Monday, August 02, 2021

Climate Change: A $3.5 billion mistake

In May last year the government increased the ETS fixed price option to $35, as a prelude to moving to an auction-based system with a cost-containment reserve. At the time, carbon prices were $25 - hard up against the previous price cap - so it must have looked impossibly high. In retrospect, setting it do low, even for a final year, is looking like a huge mistake. How huge? 30 million tons worth:

More than 80% of companies in New Zealand’s emissions trading scheme paid the NZ$35 fixed price option (FPO) instead of surrendering allowances for 2020 compliance, according to EPA data, saddling the government with another 30 million surplus NZUs to digest.
That's 30 million extra tons NZ polluters will now be allowed to emit, over and above the 120 million tons they had already stockpiled by past abuse of the system. The social cost of that carbon on the government's books is $4.5 billion (though part of that cost has been met, so the net cost is $3.45 billion). But fundamentally, its 30 million tons. 30 millions tons that we - and the planet - cannot afford.

If another government policy had resulted in a $3.5 billion blowout, you'd expect to be hearing a lot about it. On this... crickets. As for how to fix it, the government will need to gouge that 30 million tons out of future ETS allocations, to make polluters use their stockpiled credits. And they need to make sure that they don't give polluters any more.

And on that front, remember that the government is at a real risk of blowing the ETS budget again on 1 September if it doesn't raise the auction price cap. The cost of that mistake is another 7 million tons, valued by the government at just over a billion dollars. Normally when faced with a completely avoidable billion dollar mistake, the government would be legislating urgently to stop it. But on this, they're just sitting on their hands, pretending helplessness. If they'd had that attitude to Covid, we'd all be fucking dead.

This government was meant to cut emissions. Instead, they've allowed an extra half a year's worth, just in the last year, by poor policy design and a refusal to correct it. And that is just not acceptable. The government needs to start treating this like an actual, Covid-level crisis - because it is. Every day they delay doing that, the worse it is going to get.